Structuring Incremental Loan Facilities: Key Terms for Lenders and Borrowers

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Structuring Incremental Loan Facilities: Key Terms for Lenders and Borrowers Conditions Precedent, Incremental Capacity, Most Favored Nation Provisions, "Sidecar" Debt TUESDAY, SEPTEMBER 25, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: J. Christian Nahr, Partner, Fried Frank Harris Shriver & Jacobson, New York Michael J. Steinberg, Partner, Shearman & Sterling, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1.

2 Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial and enter your PIN when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you that you will receive immediately following the program. For additional information about continuing education, call us at ext. 2.

4 Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: Click on the ^ symbol next to Conference Materials in the middle of the lefthand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

5 STRAFFORD INCREMENTAL FACILITIES

6 PART I Shearman & Sterling LLP 6

7 I. INTRODUCTION TO INCREMENTAL FACILITIES What is an Incremental Facility? An incremental facility is an extension of new commitments and/or loans implemented under the aegis of a Borrower s existing credit facility documentation, which extensions of commitments or credit are made subject to the specific incremental incurrence requirements set out in such existing credit facility documentation. In this section: Uses Characteristics Advantages Disadvantages Shearman & Sterling LLP 7

8 I. INTRODUCTION TO INCREMENTAL FACILITIES Uses of Incremental Facilities Incremental facilities may be incurred for a number of purposes: Financing acquisitions of business entities or assets Increasing borrowing capacity to reflect the Borrower s growth / general corporate purposes Refinancing existing debt (including for purposes of repricing existing debt, for terming out revolving debt, or replacing non-consenting lenders without using a yank-a-bank process) Funding dividends or other distributions (i.e. a Dividend Recap ) Shearman & Sterling LLP 8

9 I. INTRODUCTION TO INCREMENTAL FACILITIES Characteristics of an Incremental Facility An incremental facility: May consist of immediately funded, or delayed-draw, term loans or bridge loans, or revolving credit commitments May be implemented as either a new credit facility or as an upsizing of an existing credit facility May be implemented via an amendment agreement, an incremental assumption agreement or an amendment and restatement of the existing credit document Shearman & Sterling LLP 9

10 I. INTRODUCTION TO INCREMENTAL FACILITIES Advantages of Incremental Facilities Incremental facilities can be advantageous because: Implementation requires only the consent of the new lenders under the incremental facility and (usually) the administrative agent, and not that of the existing lenders (with limited exceptions for incremental revolving facilities) The credit documentation to implement an incremental facility tends to be short and inexpensive to implement New incremental lenders share in existing guarantees and security arrangements, without a need for new intercreditor agreements Marketing and syndication tend to be quick, as the market is already familiar with the credit and the process Incremental credit facilities already constitute permitted indebtedness and permitted liens under the terms of the existing credit documentation Shearman & Sterling LLP 10

11 I. INTRODUCTION TO INCREMENTAL FACILITIES Disadvantages of Incremental Facilities Incremental facilities may be disadvantageous to a Borrower because: New incremental lenders often inherit the terms and provisions of the existing credit documentation (other than terms like price, maturity, amortization and size), which may no longer be market Prepayments usually shared ratably with the existing credit facilities The administrative and collateral agents may not be to the liking of the new incremental lenders Existing lenders may be sharing collateral and payment priority with more aggressive (and more lightly regulated) incremental lenders Shearman & Sterling LLP 11

12 II. INCREMENTAL CAPACITY The total amount of commitments (and loans) under incremental facilities that the Borrower may incur pursuant to the provisions of the existing credit documentation. In this section: Incremental Fixed Amount Leverage Governed Incremental Amount Prepayments Amount Order Of Use Reloading Of Incremental Capacity Shearman & Sterling LLP 12

13 II. INCREMENTAL CAPACITY Incremental Fixed Amount The Incremental Fixed Amount (the Fixed Amount or freebie amount ) is the most straightforward Traditionally, the Fixed Amount was simply expressed as a fixed dollar basket which would be reduced by each use of the capacity under the Fixed Amount Now the Fixed Amount may be a grower basket linked to the Borrower s LTM EBITDA (i.e. the greater of (x) $[ ] million and (y) [ ]% of the Borrower s Consolidated Adjusted EBITDA for the most recently completed four fiscal quarter period for which financial statements have been provided ) The Borrower s preference is usually to apply the Fixed Amount capacity last after all other of capacity baskets In an ABL revolving credit facility, the Incremental Capacity is usually only a fixed amount, which may be applied to increase the ABL facility, or to add new last-out revolving credit facilities and/or add new first-in, last-out (FILO) term loans Shearman & Sterling LLP 13

14 II. INCREMENTAL CAPACITY Leverage Governed Incremental Amount The Leverage Governed Incremental Amount (the Ratio Amount or unlimited amount ) is the most complicated component of the Incremental Capacity, and is often heavily negotiated The Ratio Amount permits the incurrence of however much incremental debt may be incurred without causing the Borrower to exceed an agreed upon maximum leverage ratio (or to satisfy minimum a fixed charge or interest coverage ratio), with such ratio calculated using the results of the most recently reported four fiscal quarter period, giving pro forma effect to such incurrence (or incremental commitments, for incremental revolvers) Shearman & Sterling LLP 14

15 II. INCREMENTAL CAPACITY Where incremental debt is incurred to fund an acquisition or other investment, the credit documentation may also provide: That the Ratio Amount is to be tested giving pro forma effect to the application of such incremental debt (i.e. giving credit for to purchased EBITDA ) That the Ratio Amount may be tested at the time that the Borrower enters into an acquisition/purchase agreement, rather than at the time of incurrence, to allow the Borrower to provide more funding certainty to the sellers in such transaction Also, ratio-based incremental capacity for acquisitions may be tested on a no worse than basis (rather than against a set ratio) Shearman & Sterling LLP 15

16 II. INCREMENTAL CAPACITY Choice of Maximum Leverage Ratio(s) The choice of which leverage ratio or ratios to use in testing for the Ratio Amount will be guided by the Borrower s capital structure, and the priority characteristics of the debt which the Borrower is permitted to incur The contemporary approach is to include multiple maximum leverage ratio tests in the provision defining the Ratio Amount, and to test each incurrence of incremental debt under only the appropriate maximum leverage ratio, depending on such incremental debt s actual lien priority This approach has at least some risk in that it could allow a Borrower to incur substantial incremental senior unsecured debt up to the maximum permitted total leverage ratio, and then subsequently obtain additional first lien secured incremental debt up to the maximum first lien secured leverage ratio, resulting in a very high total leverage ratio In recent transactions, the Borrower has also been permitted to use a minimum fixed charge coverage ratio or interest coverage ratio test for the incurrence of senior unsecured incremental debt under the Ratio Amount, as an alternative to the maximum total leverage ratio test Shearman & Sterling LLP 16

17 II. INCREMENTAL CAPACITY Accounting for Incremental Revolving Facilities Because it is not expected that incremental revolving facilities will be immediately drawn in full, in performing the pro forma calculation necessary to test a Borrower s ability to obtain additional incremental revolving credit capacity under the Ratio Amount, it is necessary to assume that the entire amount of such incremental revolving capacity is fully drawn for the purposes of running such pro forma test In addition, the incremental provisions of the credit documentation should also provide that, in testing for the ability to use the Ratio Amount, all previously incurred incremental revolving capacity should also be assumed to be fully drawn Shearman & Sterling LLP 17

18 II. INCREMENTAL CAPACITY Prepayments Amount The Borrower may also acquire additional incremental capacity based on its voluntary prepayment of other debt, whether occurring prior to, or contemporaneously with, the incurrence of new incremental debt By permitting contemporaneous voluntary prepayment of existing debt, a Borrower can use incremental debt to refinance outstanding debt, which may be useful when the debt being incurred does not meet the more strict requirements to qualify as Refinancing Indebtedness under the credit documentation, or when a Borrower is using incremental debt to refinance out non-consenting lenders, including in the context of an Amend and Extend transaction Generally, Incremental Capacity will only be generated by the voluntary prepayment of term debt, though in some cases the prepayment of pari passu revolving debt, along with a permanent reduction in the revolving credit commitments, will be given credit under the Prepayments Amount Where the debt being refinanced was originally incurred as incremental term debt, the Borrower should only be given prepayment credit where such debt was originally incurred in reliance on the Fixed Amount, or on the Prepayments Amount (though this could also include Incremental Equivalent Debt incurred under those amounts) Shearman & Sterling LLP 18

19 II. INCREMENTAL CAPACITY Order of Use In many recent transactions, the credit documentation will specify that if there is a contemporaneous incurrence of incremental debt under both the Fixed Amount and the Ratio Amount, such incurrence will be deemed to have first used all available capacity under the Ratio Amount, and that any remainder will be deemed to have occurred under the Fixed Amount (and that the maximum leverage covenant test for the incurrence under the Ratio Amount shall be calculated as if there was no incurrence of the remainder under the Fixed Amount); in cases where this type of provision is not included, Borrowers will often include timing language in the incremental amendment that is designed to achieve the same effect Recently, Borrowers have been requesting the ability to reclassify after the fact incremental debt which was originally incurred under the Fixed Amount, as incremental debt incurred under the Ratio Amount, if the Borrower later satisfies the applicable pro forma maximum leverage ratio test; in some cases, Borrowers have requested that such reclassification occur automatically Shearman & Sterling LLP 19

20 II. INCREMENTAL CAPACITY Reloading of Incremental Capacity In cases where (1) a Borrower is obtaining incremental commitments or loans in circumstances where lenders sufficient to constitute the Required Lenders under the credit documentation will be party to the documents implementing such incremental incurrence (including new incremental lenders), and (2) such incremental incurrence is being made in reliance on the Fixed Amount (or previous incremental incurrences have been made in reliance on the Fixed Amount), then the Borrower may take the opportunity to request that the Required Lenders agree to an amendment which reloads the Fixed Amount to its original full capacity The Required Lenders determination as to whether to grant such consent would depend on the Borrower s financial performance and its pro forma leverage levels as compared to any maximum leverage ratio tests governing incurrence under a Ratio Amount Shearman & Sterling LLP 20

21 III. OTHER KEY TERMS The incremental provisions of the credit documentation will generally include a number of other key provisions limiting the terms of the incremental debt which may be incurred. In this section: Maturity / Tenor Weighted Average Life To Maturity Application / Sharing of Prepayments Guarantees and Security Lien Priority Additional Covenants / Financial Covenants Minimum Principal Amounts Shearman & Sterling LLP 21

22 III. OTHER KEY TERMS Maturity / Tenor Incremental term loans are generally not permitted to mature earlier than the maturity date of the original term loan debt outstanding under the credit documentation, and in some cases the requirement will be that incremental term loans must mature at least 91 days after the original term loans Some documentation will use a Latest Maturity Date (or similar) definition to ensure that any each new incremental term facility matures after the maturity of the latest-maturing previously incurred incremental term loan facility, essentially creating an automatic, adaptable minimum term provision, for example Latest Maturity Date means, as of any date of determination, the latest maturity or expiration date applicable to any Loan or Commitment established hereunder, at such time, including the latest maturity or expiration date of any Incremental Loan, Extended Term Loan or Extended Revolving Commitment, in each case as may have been extended from time to time in accordance with the provisions hereof Shearman & Sterling LLP 22

23 III. OTHER KEY TERMS Borrowers may request a carve-out from the maturity requirement to allow the Borrower to incur some amount of incremental term loans with earlier maturities, up to a maximum principal amount governed by a fixed dollar basket; when included, this will generally be subject to Market Flex to remove this feature Shearman & Sterling LLP 23

24 III. OTHER KEY TERMS Weighted Average Life to Maturity In general, incremental term loans may not have a weighted average life to maturity that is shorter than the weighted average life to maturity of the exiting term loans under the credit documentation Weighted Average Life to Maturity means, when applied to any indebtedness, disqualified stock or preferred stock, as the case may be, at any date, the quotient obtained by dividing (x) the sum of the products of the number of years from the date of determination to the date of each successive scheduled principal payment of such indebtedness or redemption or similar payment with respect to such disqualified stock or preferred stock multiplied by the amount of such payment; by (y) the sum of all such payments Borrowers may request a carve-out from the minimum weighted average life to maturity requirement to allow the incurrence of some incremental term loans with shorter weighted average life to maturity, based on a dollar basket; this is a controversial point, and when included will generally be subject to the arrangers right to use Market Flex to remove this feature Shearman & Sterling LLP 24

25 III. OTHER KEY TERMS Application / Sharing of Prepayments Generally, incremental term loan facilities will share in voluntary and mandatory prepayments on a pro rata basis, though it has become more common to permit incremental term facilities to share on a less than pro rata basis if the applicable incremental lenders agree to do so in the incremental documentation In some transactions, Borrower has the right to allocate voluntary prepayments among different existing and incremental term loan facilities such that original term loan facilities receive less than a pro rata share of voluntary prepayments Borrowers may also request the ability to allocate mandatory prepayments such that existing term loan facilities would receive a less than pro rata share, but with the exception of refinancing specific term loan facilities and allocating mandatory prepayments to term loan facilities with an earlier maturity date, lenders usually reject this Shearman & Sterling LLP 25

26 III. OTHER KEY TERMS Guarantees and Security Incremental debt will generally be guaranteed by the same guarantors, and on the same basis, as the existing debt under the credit documentation To the extent that incremental debt is secured debt, it will be secured by pledges of the same collateral as is already pledged to secure the existing secured debt under the credit documentation, either on a pari passu basis with the existing secured debt, or where permitted, on a junior lien basis In no event will secured incremental debt be secured by a pledge of collateral which has not been pledged to secure the existing secured debt Shearman & Sterling LLP 26

27 III. OTHER KEY TERMS Lien Priority Traditionally, the most common structure is to only permit incremental debt to be secured pari passu as to lien priority with the existing debt under the credit documentation More recent credit documentation permits incremental debt to be issued on a junior lien secured basis (subject to an intercreditor agreement on terms reasonably acceptable to the administrative agent under the credit documentation), and/or on a senior unsecured basis Although incremental debt may have a lien priority that is junior to that of the existing debt under the credit documentation, incremental debt is usually pari passu in right of payment with the original debt under the credit documentation (where permitted, subordinated debt may be incurred as Incremental Equivalent Debt, subject to subordination terms reasonably acceptable to the administrative agent) Shearman & Sterling LLP 27

28 III. OTHER KEY TERMS Additional Covenants / Financial Covenants In general, an incremental facility will be subject to the same covenants and other terms as the existing facilities under the credit documentation (other than pricing, maturity, amortization, lien priority (where permitted) and prepayments) Credit documentation usually provides that if an incremental facility is made subject to any additional protective covenants (including any financial maintenance covenants), that such covenants must be reasonably acceptable to the administrative agent under the credit documentation, except that: If an incremental facility is made subject to a financial maintenance covenant, then as long as such financial maintenance covenant is also applied to the existing debt facilities under the credit documentation, the consent of the administrative agent will not be required; and If an incremental facility is made subject to additional protective covenants (including financial maintenance covenants) which do not become effective until after the scheduled maturity of the existing debt, such additional covenants will not require the consent of the administrative agent Shearman & Sterling LLP 28

29 III. OTHER KEY TERMS Borrowers have recently begun requesting that terms applicable to incremental facilities which are inconsistent with the terms of the credit documentation, but which are on market terms at the time of the incremental incurrence (as determined in good faith by the Borrower), be permitted without the consent of the administrative agent; acceptance of this is currently mixed Shearman & Sterling LLP 29

30 III. OTHER KEY TERMS Minimum Principal Amounts In general, the credit documentation will provide for a minimum size for incremental incurrences ($10 million is common) and for minimum increments in excess thereof ($1 million is common), or the principal amount that is equal to all of the then-remaining incremental capacity Credit documentation may require a higher minimum principal commitment amount for new incremental revolving facilities, and may permit a lower minimum principal commitment amount for incremental revolving capacity implemented as an upsizing of an existing revolving credit facility The minimum amount of an incremental facility or incremental increase will be influenced by the minimum amount that the underwriter or arranger reasonably believes that it can place in the market Shearman & Sterling LLP 30

31 IV. MOST FAVORED NATION PROVISIONS The Most Favored Nation provision or MFN is a provision designed to prevent a Borrower from incurring incremental loans with substantially higher pricing than the pricing under the original credit documentation. In this section: The MFN Provision Sunset and Flex Shearman & Sterling LLP 31

32 IV. MOST FAVORED NATION PROVISIONS The MFN Provision An MFN provision operates such that, if any incremental facilities have a higher all-in yield than the all-in yield under the corresponding existing debt facilities (but subject to a cushion, currently commonly set at 50 bps, or at 75 bps with Market Flex to 50 bps), then the interest rate margin applicable to the corresponding existing debt will be increased to produce an all-in yield that is equal the all-in yield under the incremental facilities (subject to the cushion) MFN protection will generally not apply to junior lien or senior unsecured incremental debt MFN protection usually only applies to the term facilities, and may be further differentiated between existing and incremental term loan A facilities, and existing and incremental term loan B facilities To the extent MFN is applied to revolving facilities, the most common use is in ABL Facilities, though this is less common Shearman & Sterling LLP 32

33 IV. MOST FAVORED NATION PROVISIONS The determination as to whether to apply the MFN provision to increase the pricing on a tranche of existing debt is made based on the respective all-in yields of the two debt tranches being compared Although definitions will vary slightly across lenders and transactions, the all-in yield is generally determined inclusive of interest rate margins, interest rate floors, and original issue discount and upfront fees (based on a four-year average life to maturity), but excluding arrangement, structuring, underwriting and other similar fees paid arrangers In more recent sponsor transactions, carve-outs from MFN can be based on (i) the maturity date of the incremental facility (i.e. more than [2] years after the maturity date), (2) the purpose of the incremental (i.e. MFN won t apply to incrementals used for acquisitions), (3) a dollar basket (sometimes with a grower), and/or (4) whether the incremental was incurred under the Ratio Amount or the Fixed Amount. These carve-outs are frequently be subject to removal using Market Flex. Shearman & Sterling LLP 33

34 IV. MOST FAVORED NATION PROVISIONS Sunset and Flex MFN provisions often terminate (or sunset ) after an agreed period of time (12 months is currently prevalent, though not long ago 6 months was common) In committed or underwritten financings, the MFN sunset is often subject to the Market Flex provisions of such financing, permitting the sunset provision to be extended for an additional specified period, or to eliminate the sunset entirely and cause the MFN provisions to apply for the life of the committed credit facilities Shearman & Sterling LLP 34

35 MICHAEL STEINBERG Partner, New York New York T M michael.steinberg@shearman.com Shearman & Sterling LLP 35

36 ABU DHABI AUSTIN BEIJING BRUSSELS DUBAI FRANKFURT HONG KONG HOUSTON LONDON MENLO PARK MILAN NEW YORK PARIS RIYADH* ROME SAN FRANCISCO SÃO PAULO SHANGHAI SINGAPORE TOKYO TORONTO WASHINGTON, DC Copyright 2018 Shearman & Sterling LLP. Shearman & Sterling LLP is a limited liability partnership organized under the laws of the State of Delaware, with an affiliated limited liability partnership organized for the practice of law in the United Kingdom and Italy and an affiliated partnership organized for the practice of law in Hong Kong. Attorney Advertising Prior results do not guarantee a similar outcome. *Dr. Sultan Almasoud & Partners in association with Shearman & Sterling LLP

37 V. Closing Conditions VI. Incremental Equivalent or Sidecar Debt VII. Documentation VIII. Annex Selected Definitions Attorney Advertising. Prior results do not guarantee a similar outcome. New York Washington, DC London Frankfurt

38 V. Closing Conditions/Typical Conditions Typical conditions to incurrence of incremental loans include: No Default or Event of Default is continuing or would result therefrom If the proceeds of the incremental loans will be used to finance a so-called Limited Conditionality Transaction (discussed in greater detail below), some incremental facilities may waive this requirement or limit it to payment and bankruptcy defaults Accuracy of representations and warranties If the proceeds of the incremental loans will be used to finance a Limited Conditionality Transaction, some incremental facilities may limit this to (known as SunGard conditionality): Certain fundamental reps and warranties in the credit agreement (e.g., power and authority, due authorization, non-contravention of organizational documents, etc.) Reps and warranties made by or on behalf of the applicable acquired company or business in the acquisition agreement as are material to the interests of the lenders under the credit agreement (but only to the extent that the borrower or its affiliates has a right to terminate the acquisition as a result of a breach of such reps and warranties) Historically and today in some mid-market deals, pro forma compliance with a financial covenant or other financial test Incurrence in excess of minimum amounts In some mid-market deals, limitations on time and number of times incremental facilities can be incurred Delivery of customary closing documentation (discussed in greater detail below) 38

39 V. Closing Conditions/Limited Conditionality Transactions Limited Conditionality Transactions acquisitions and investments that are not subject to a financing contingency Level of commitment negotiated LOI sufficient? Inclusion of other transactions, e.g., debt repayment Timing of testing ratio test At time of incurrence At time of commitment If tested at time of commitment, an issue that gets negotiated is how to address subsequent transactions Test on pro forma basis assuming transaction has closed Test on actual basis Either/or both? A la carte approach Most common in large cap transactions Rarer in middle market and then often tied to additional limitations; e.g., time limit between date of commitment and incurrence 39

40 V. Closing Conditions/Terms Other than as described below, the terms, provisions and documentation of the incremental loans may be as agreed by the borrower and the incremental lenders Hardwire ability to amend existing loans in a manner not adverse to existing lenders, e.g., Extend or renew soft-call protection Increase amortization (to preserve fungibility) Add financial and other covenants (to the extent required by the incremental lenders) 40

41 V. Closing Conditions/Terms Common required terms of incremental loans: Must rank pari passu (or, in some cases, junior) in right of payment and lien priority May participate on a pro rata basis or less than pro rata basis (but not on a greater than pro rata basis) in any voluntary or mandatory prepayments of loans; some deals no longer feature this restriction or limit it to mandatory prepayments May not mature earlier than applicable existing loans In the case of incremental term loans: Must have a weighted average life to maturity no shorter than the weighted average life to maturity of the existing term loans May have an amortization schedule as agreed by the borrower and the incremental lenders Seeing carve-outs for capped amount that may have an earlier maturity (so-called Permitted Early Maturity Exception) and customary bridge facilities May not be secured by assets, or guaranteed by guarantors, different from existing loans 41

42 V. Closing Conditions/MFN Yield on incremental loans may be as agreed by the borrower and the incremental lenders, except: If the yield on incremental loans exceeds the yield on applicable existing loans by more than 50/75 basis points (100 bps in Europe), the yield on such existing loans must be increased to within that amount of the yield on incremental loans This is referred to as an MFN Methodology for calculating yield will be agreed in the credit agreement, but typically includes interest rate margins and floors, as well as upfront fees or OID, but not arrangement fees Often (but not always) may be subject to a sunset of between 6 and 24 months Seeing carve-outs: Only applicable to ratio amount, not the freebie basket or vice versa Debt maturing one or more years after latest applicable maturity De minimis amounts Acquisition financings Does not apply to incremental revolving facilities 42

43 VI. Incremental Equivalent or Sidecar Debt/Introduction In addition to the ability to incur additional secured debt under the incremental facility, some credit agreements give the borrower the flexibility to incur incremental equivalent debt outside the credit facility Becoming more common in mid market, but by no means universal May take the form of pari passu secured notes or loans (sometimes referred to as sidecar loan agreements) or junior lien, unsecured or subordinated loans or notes 43

44 VI. Incremental Equivalent or Sidecar Debt/Incurrence Tests Incurrence tests are becoming more aggressive: First lien net leverage test for pari passu debt at closing date level and no worse than prong if proceeds are used to finance an acquisition or investment Net secured leverage test for junior lien debt with cushion over closing date level and no worse than prong Total net leverage for unsecured debt (or debt secured by assets that are not Collateral (subject to nonguarantor cap)) with cushion over closing date level and no worse than prong Also seeing 2x cash interest coverage test for unsecured (and in some cases junior lien debt) and no worse than prong No worse than prongs and cash interest coverage tests subject to flex and still rare in mid market 44

45 VI. Incremental Equivalent or Sidecar Debt/Incurrence Tests Like incremental debt, also includes a freebie basket, a prong for voluntary prepayments and incremental equivalent loans utilized to refinance existing loans Fixed dollar or freebie basket (often with a grower based on a percentage of LTM EBITDA or Total Consolidated Assets) typically shared with the fixed dollar basket for incremental facilities Sometimes shared with general debt basket Voluntary prepayment prong should cover both incremental and incremental equivalent debt Any leveraged-based test typically mirrors the leveraged-based test for incremental facilities Include general concept that if debt incurred based on different tests (e.g., dollar basket and a leverage test), debt incurred under the dollar basket is not included in pro forma calculation In mid-market, tests are less aggressive and usually do not feature no worse than prongs or tests based on cash interest coverage Mid-market incremental equivalent facilities often feature a hard $ cap 45

46 VI. Incremental Equivalent or Sidecar Debt/Terms Incremental equivalent loans: No limitations on pricing, rate floors, discounts, fees and optional redemption provisions May participate on a pro rata basis or less than pro rata basis (but not on a greater than pro rata basis) in any voluntary or mandatory prepayments of loans; some deals no longer feature this restriction If secured on a pari passu basis, may not mature earlier than the term loan maturity date If secured on a junior basis or unsecured may not mature earlier than 91 days after the term loan maturity date Similar limitations on weighted average life to maturity Seeing carve-outs for capped amount that may have an earlier maturity (so-called Permitted Early Maturity Exception) and customary bridge facilities May not be secured by assets, or guaranteed by guarantors, different from existing loans Either no limitations on other terms and conditions OR other terms and conditions are: Not materially less favorable (when taken as a whole) to the Holdings and its restricted subsidiaries than the terms and conditions of the First Lien Facilities Documentation (when taken as a whole) or customary for issuances of high yield securities 46

47 VI. Incremental Equivalent or Sidecar Debt/MFN Application of MFN. Variations include: Does not apply at all Often a flex item Applies in all cases where additional debt is pari passu Applies only if the incremental equivalent debt is pari passu AND is in the form of notes MFN does not apply to pari passu secured notes In some instances, MFN is limited to syndicated term B loans Often a flex item Typical in syndicated deals. Market practice in the mid-market is mixed 47

48 VII. Documentation Incremental amendment Borrower, administrative agent, new lenders Sometimes just notice to the administrative agent Reaffirmation by guarantors Incremental Equivalent Debt Stand alone documentation Customary closing documentation Borrowing request Legal opinions, including (where applicable) from local counsel Board resolutions Solvency certificate Good standing certificates Secretary s certificates 48

49 VII. Documentation Fungiblity Desire to have the incremental term loans and existing term loans trade as a single class increases liquidity As a result, incremental loans are usually structured to be fungible from a tax perspective General concept is that the incremental loans must be issued at same interest rate as existing loan However, exceptions based on timing and for de minimis OID; rules are complex and fact-specific If existing term loan has had amortization payments, typical to reset the amortization based on the amount outstanding at the time the incremental facility was incurred and to increase the amortization percentage in order to ensure that existing lenders get the same dollar payment 49

50 VIII. Annex Selected Definitions Incremental Equivalent Debt Example 1: Permitted indebtedness will include: (a) if such indebtedness is to be secured by the Collateral on a pari passu basis with the First Lien Facilities ( First Lien Pari Passu Incremental Equivalent Indebtedness ), an amount equal to the sum of: (i) an amount that does not cause the Total Net First Lien Leverage Ratio, excluding any amounts drawn simultaneously under subclauses (ii), (iii) and (iv) of this clause (a), to exceed (x) the Total Net First Lien Leverage Ratio as of the Closing Date or (y) to the extent the proceeds of such indebtedness are used to finance a permitted acquisition or investment, the Total Net First Lien Leverage Ratio immediately prior to giving effect to such permitted acquisition or investment, plus (ii) in the case of such indebtedness that serves to effectively extend the maturity of any class of First Lien Indebtedness, an amount equal to the portion of the relevant facility that will be replaced by such indebtedness, plus (iii) to the extent not made with proceeds of long-term indebtedness (other than a revolving facility), all voluntary prepayments, debt buybacks and permanent commitment reductions with respect to First Lien Indebtedness, plus (iv) the greater of 100% of LTM EBITDA as of the Closing Date and 100% of LTM EBITDA, (b) if such indebtedness is to be secured by the Collateral on a junior lien basis to the First Lien Facilities, (i) an amount that either (I) does not cause the Total Net Secured Leverage Ratio, excluding any amounts drawn simultaneously under subclauses (ii), (iii) and (iv) of this clause (b), to exceed (x) the Total Net Secured Leverage Ratio as of the Closing Date or (y) to the extent the proceeds of such indebtedness are used to finance a permitted acquisition or investment, the Total Net Secured Leverage Ratio immediately prior to giving effect to such permitted acquisition or investment or (II) does not cause the Interest Coverage Ratio to be less than (x) 2.00 to 1.00 or (y) to the extent the proceeds of such indebtedness are used to finance a permitted acquisition or investment, the Interest Coverage Ratio immediately prior to giving effect to such permitted acquisition or investment, plus (ii) in the case of such indebtedness that serves to effectively extend the maturity of any class of First Lien Indebtedness or Junior Lien Indebtedness, an amount equal to the portion of the relevant facility that will be replaced by such indebtedness, plus (iii) to the extent not made with proceeds of long-term indebtedness (other than a revolving facility), all voluntary prepayments, debt buybacks and permanent commitment reductions with respect to previously incurred First Lien Indebtedness and Junior Lien Indebtedness (minus, in the case of this clause (b)(iii), indebtedness incurred pursuant to clauses (a)(iii) above and (c)(iii) below (in each case, solely to the extent such incurrence is made in reliance on voluntary prepayments, debt buybacks and permanent commitment reductions of First Lien Indebtedness or Junior Lien Indebtedness), the First Lien Incremental Prepayment Amount and the Second Lien Incremental Prepayment Amount), plus (iv) the greater of 100% of EBITDA as of the Closing Date and 100% of LTM EBITDA (minus, in the case of this clause (b)(iv), indebtedness incurred (without duplication) pursuant to the First Lien Incremental Fixed Amount, the Second Lien Incremental Fixed Amount and clauses (a)(iv) above and (c)(iv) below), and (c) if

51 VIII. Annex Selected Definitions such indebtedness is to be unsecured or secured by assets not constituting Collateral, (i) an amount that either (I) does not cause the Total Net Leverage Ratio, excluding any amounts drawn simultaneously under clauses (ii) and (iii) below, to exceed (x) 1.5x greater than the Total Net Leverage Ratio as of the Closing Date or (y) to the extent the proceeds of such indebtedness are used to finance a permitted acquisition or investment, the Total Net Leverage Ratio immediately prior to giving effect to such permitted acquisition or investment or (II) does not cause the Interest Coverage Ratio (to be defined in a manner consistent with the Documentation Principles) to be less than (x) 2.00 to 1.00 or (y) to the extent the proceeds of such indebtedness are used to finance a permitted acquisition or investment, the Interest Coverage Ratio immediately prior to giving effect to such permitted acquisition or investment, plus (ii) in the case of such indebtedness that serves to effectively extend the maturity of any class of First Lien Indebtedness or Junior Lien Indebtedness, an amount equal to the portion of the relevant facility that will be replaced by such indebtedness, plus (iii) to the extent not made with proceeds of long-term indebtedness (other than a revolving facility), all voluntary prepayments, debt buybacks and permanent commitment reductions with respect to previously incurred First Lien Indebtedness and Junior Lien Indebtedness, unsecured indebtedness and indebtedness secured by assets not constituting Collateral (minus, in the case of this clause (c)(iii), indebtedness incurred pursuant to clauses (a)(iii) and (b)(iii) above (in each case, solely to the extent such incurrence is made in reliance on voluntary prepayments, debt buybacks and permanent commitment reductions of First Lien Indebtedness or Junior Lien Indebtedness), the First Lien Incremental Prepayment Amount and the Second Lien Incremental Prepayment Amount), plus (iv) the greater of 100% of EBITDA as of the Closing Date and 100% of LTM EBITDA (minus, in the case of this clause (c)(iv), indebtedness incurred the Incremental Equivalent Basket ); provided that such indebtedness shall (A) subject to the Permitted Earlier Maturity Indebtedness Exception and excluding customary bridge facilities, in the case of indebtedness secured on a pari passu basis with the First Lien Facilities, have a final maturity date no earlier, and a weighted average life to maturity no shorter, than the latest maturity date and weighted average life of the First Lien Facilities, and in the case of other indebtedness, have a maturity date and weighted average life to maturity at least 91 days after the latest maturity date and weighted average life of the First Lien Facilities, with no greater amortization or mandatory prepayments than the First Lien Facilities, (B) have terms and conditions (other than pricing, rate floors, discounts, fees and optional redemption provisions) that are either (i) not materially less favorable (when taken as a whole) to the Holdings and its restricted subsidiaries than the terms and conditions of the First Lien Facilities Documentation (when taken as a whole) or (ii) customary for issuances of high yield securities, (C) to the extent such indebtedness is incurred by the Borrower or any Guarantor is secured, not be secured by any assets other than the Collateral, (D) to the extent such indebtedness is incurred by the Borrower or any Guarantor is guaranteed, not be guaranteed by any person other than the Guarantors, (E) be subject to a cap for non-guarantors equal to the greater of $[ ] and an equivalent percentage of LTM EBITDA, and (F) no event of default shall have occurred and be continuing or would result therefrom (or, in the case of a permitted acquisition or investment that is a Limited Condition Transaction, no payment or bankruptcy event of default);

52 VIII. Annex Selected Definitions Incremental Equivalent Debt Example 2: The Facilities will permit the Borrowers incur one or more incremental equivalent term loan facilities to the Facilities (each, an Incremental Equivalent Term Facility and the loans thereunder the Incremental Equivalent Term Loans ); provided that (i) the Incremental Equivalent Facilities do not exceed in the aggregate $ [ ] million, (ii) the Total First Lien Net Leverage Ratio does not exceed [ ] to 1.00 on a pro forma basis and Total Net Leverage Ratio does not exceed [ ] to 1.00 on a pro forma basis, (iii) no default or event of default has occurred and is continuing or would result therefrom, (iv) no Lender will be required to participate in any such Incremental Equivalent Facility, (v) the Incremental Equivalent Facilities will be senior obligations of the Borrowers and the Guarantors and rank pari passu in right of payment and security with the other First Lien Facilities, (vi) the Incremental Equivalent Term Facilities will have a final maturity no earlier than the final maturity of the Term Loan Facility, (vii) the weighted average life to maturity of any such Incremental Equivalent Term Facility will not be shorter than the weighted average life of the Term Loan Facility, (viii) subject to (v) above, the amortization schedule (if any) applicable to any Incremental Equivalent Term Facility will be determined by Topco Borrower and the lenders thereunder will not have amortization or scheduled mandatory commitment reductions (other than at maturity), (ix) the all-in yield (whether in the form of interest rate margins, original issue discount, upfront fees or an interest rate floor, with such increased amount being equated to interest margin for purposes of determining any increase to the applicable interest margin under the Term Loan Facility) applicable to any Incremental Equivalent Facility will be determined by Topco Borrower and the lenders providing such Incremental Equivalent Facility; provided that, with respect to any Incremental Equivalent Term Facility, the all in yield will not be more than 0.50% higher than the corresponding all-in yield (after giving effect to interest rate margins (including the floors (subject to the second proviso in this clause (vii)), original issue discount ( OID ) (with OID being equated to interest based on an assumed four-year life to maturity) and upfront fees (which will be deemed to constitute like amount of OID), but excluding any arrangement, structuring or other fees payable in connection therewith that are not shared with all lenders providing such Incremental Equivalent Facility, which will not be included and equated to the interest rate) for the existing Term Loan Facility, unless the interest rate margins with respect to the existing Term Loan are increased by an amount equal to the difference between the all-in yield with respect to

53 VIII. Annex Selected Definitions the applicable Incremental Equivalent Facility and the corresponding all in yield on the existing Term Loan Facility, minus 0.50%; provided, further, if the applicable Incremental Equivalent Facility includes an interest rate floor greater than the applicable interest rate floor under the existing Term Loan Facility such differential between the interest rate floors will be equated to the applicable interest rate margin for purposes of determining whether an increase to the interest rate margin under the existing Term Loan Facility will be required, but only to the extent an increase in the interest rate floor in the existing Term Loan Facility would cause an increase in the interest rate then in effect thereunder, and in such case the interest rate floor (but not *the interest rate margin) applicable to the existing Term Loan Facility will be increased to the extent of such differential between interest rate floors, (x) Incremental Equivalent Facilities may be incurred in U.S. dollars only, (xi) (except to the extent permitted, all terms and documentation with respect to any Incremental Equivalent Facility will be substantially identical to the terms applicable to the Term Loans or will be reasonably satisfactory to the Required Lenders, (xii) any Incremental Equivalent Term Facility will share ratably in any voluntary or mandatory prepayments of the Term Loan Facility, unless Topco Borrower and the lenders in respect of such Incremental Equivalent Term Facility agree to a less than pro rata share of such prepayments, (xiii) the Facilities Documentation will contain provisions providing for the pro rata treatment of payment, borrowing, participation and commitment reduction of the Revolving Facility and any Incremental Equivalent Revolving Facility, (xiv) Topco Borrower will offer participation in any Incremental Equivalent Facility first to [ ] and thereafter to other existing or new lenders (xv) Incremental Equivalent Facilities will only be incurred in connection with Permitted Acquisitions and similar investments and the proceeds thereof will be used solely to fund such Permitted Acquisition or similar investment, repay indebtedness in connection therewith and fund costs and expenses incurred in connection therewith. In addition, the Facilities will permit the Borrowers incur additional indebtedness (a) if such indebtedness is to be secured by the Collateral on a junior lien basis, an unlimited amount so long as the Total Net Secured Leverage Ratio does not exceed [ ] to 1.00 and Total Net Leverage Ratio does not exceed [ ] to 1.00 on a pro forma basis, and (b) if such indebtedness is unsecured, an unlimited amount so long as the Total Net Leverage Ratio does not exceed [ provided that such indebtedness shall (A) such indebtedness will have a final maturity no earlier than 91 days after the final maturity of the Term Loan Facility, (B) the lenders thereunder will not have amortization or scheduled mandatory commitment reductions (other than at maturity), ] to 1.00 on a pro forma basis; (C) have terms and conditions (other than pricing, rate floors, discounts, fees and optional redemption provisions) that are either not materially less favorable (when taken as a whole) to the Borrowers than the terms and conditions of the Facilities Documentation (when taken as a whole), (D) if any such indebtedness is secured, it shall not be secured by any assets other than the Collateral, (E) if any such indebtedness is guaranteed, it shall not be guaranteed by any person other than the Guarantors and (F) liens (if any) are subordinated to the liens for the Facilities pursuant to an intercreditor agreement reasonably satisfactory to the Required Lenders.

54 New York Washington, DC London Frankfurt J. Christian Nahr One New York Plaza New York, NY T: F: friedfrank.com